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Supreme Court holds that bribes or secret commissions received by an agent are held on trust for the principal

The recent judgment handed down by the Supreme Court in FHR European Ventures LLP and others v. Cedar Capital Partners LLC [2014] UKSC 45 has clarified that a bribe or a secret commission received by an agent is held by the agent on trust for his principal, creating a proprietary remedy against the bribe or secret commission itself. The Supreme Court overruled prior Court of Appeal authority that there was no proprietary remedy and a principal only had a claim for equitable compensation against an agent in a sum equal to the value of the bribe or secret commission.

The ruling has important practical implications. If the agent becomes insolvent, a proprietary claim will give the principal priority over the agent’s unsecured creditors. In addition, it is possible to trace and follow a proprietary claim in equity. Under English law, there is at present no equitable right to trace or follow a right to equitable compensation.

Background

On 22 December 2004, FHR European Ventures LLP and others purchased the issued share capital of Monte Carlo Grand Hotel SAM (“MCGH”) from Monte Carlo Grand Hotel Ltd (“MCGHL”) for €211.5 million. Cedar Capital Partners LLC (“Cedar”) acted as the claimants’ agent in negotiating the purchase. Unbeknownst to the claimants, Cedar had entered into an agreement with MCGHL dated 24 September 2004 which provided for the payment to Cedar of a €10 million fee following a successful conclusion of the sale and purchase. Cedar received €10 million from MCGHL on 7 January 2005.

In November 2009, the claimants commenced proceedings in the High Court seeking recovery of the sum of €10 million. The trial took place before Mr Justice Simon. Mr Justice Simon held that (a) Cedar had failed to make proper disclosure to the claimants of the brokerage agreement; (b) Cedar was liable for breach of fiduciary duty;(c) Cedar should pay €10 million to the claimants. However, Mr Justice Simon refused to grant the claimants a proprietary remedy in respect of the monies as he considered he was bound by a Court of Appeal authority to the opposite effect, Sinclair Investments Ltd v.Versailles Trade Finance Ltd [2012] Ch 453 (“Sinclair”).

The claimants’ appeal to the Court of Appeal in relation to the refusal to grant a proprietary remedy in respect of the monies was allowed. The Court of Appeal considered that it should distinguish Sinclair and it did so, making an order which included a declaration that Cedar received the €10 million fee on constructive trust for the claimants.

The issue before the Supreme Court

Cedar appealed to the Supreme Court and the issue for determination was whether the claimants were entitled to a proprietary remedy in respect of the €10 million received by Cedar from MCGHL.

The Supreme Court noted that in certain cases where an agent acquired a benefit arising from his fiduciary position, the equitable rule (referred to in the judgment as “the Rule”) was that the agent is to be treated as having acquired the benefit on behalf of the principal, such that it is beneficially owned by the principal. The effect of this is that the principal has a proprietary remedy in addition to a personal remedy against the agent, and the principal can elect between the two remedies.

The Supreme Court noted that the Rule has been applied in a great many cases but the issue in dispute was the extent to which the Rule applied where the benefit was a bribe or secret commission obtained by an agent in breach of his fiduciary duty to his principal.

The Supreme Court reviewed cases concerned with bribes and secret commissions and noted that in the majority of cases it was not in dispute that if the recipient of the benefit received it in breach of his fiduciary duty, he would be deemed to hold it on trust. However, reference was made to one decision of the House of Lords - Tyrrell v. Bank of London [1862] 10 HL Cas 26 (“Tyrell”) - which appeared to be inconsistent with this approach, and several decisions of the Court of Appeal - Metropolitan Bank v. Heiron [1880] 5 Ex D 319, Lister & Co v. Stubbs [1890] 45 Ch D 1 and Sinclair - which held that a principal has a claim for equitable compensation in respect of a bribe or secret commission received by his agent, but no proprietary interest in it.

The Supreme Court considered the extensive academic debate on the point and concluded that as a matter of pure legal authority it was not possible to identify any plainly right or plainly wrong answer to the issue of the extent of the Rule. There was some attraction to the simplicity of a formulation that any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty would be held on trust for the principal. There was also the wider public policy consideration that bribes undermine trust in the commercial world and should therefore be treated as the property of the principal, rather than merely giving rise to a claim for equitable compensation.

The Supreme Court concluded that the argument that a wide application of the Rule would tend to prejudice the agent’s unsecured creditors had limited force in the context of a bribe or secret commission, given the bribe or secret commission consisted of property which should not have been in the agent’s estate at all.

The Supreme Court held that the decision in Tyrell should not prevent it from concluding that the law took a “wrong turn” in the Court of Appeal decisions and that those decisions,and any subsequent decisions, at least insofar as they relied on or followed the Court of Appeal decisions, should be treated as overruled.

Comment

The ruling brings clarity and removes the uncertainties which had previously existed as to whether or not a proprietary remedy was available where there had been an unlawful misuse of a business opportunity by an agent obtaining a bribe or a secret commission. The effect of the ruling is that a bribe or secret commission can in theory be traced into the agent’s assets and into the hands of third parties (assuming knowing receipt) and recovered as trust property.

Compare jurisdictions: Litigation: Enforcement of Foreign Judgments

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